• Protective put portfolio is same as call with cash
• Cash = PV of strike
• Stock ends up \(\Rightarrow\)
  • With put, keep underlying
  • With call, exercise to get underlying
• Stock ends down \(\Rightarrow\)
  • With put, exercise to get cash
  • With call, keep cash

Prices of puts and calls

• Put-call parity implies that underlying price + put premium should equal PV of strike plus call premium
• Equivalently, put premium = call premium + PV of strike - underlying price
• Equivalently, call premium = put premium - PV of strike + underlying price
• Actually, this is true only for European options on stocks that don’t pay dividends before the option maturity.